Shapoorji Pallonji Group Faces Rising Bond Yields Over Asset Sale Covenant Concerns
Source and citation: Original reporting by ET Bureau published on Jan 09, 2024 on Economic Times website
Analysis for Layman
Shapoorji Pallonji group’s infrastructure company, Goswami Infratech, witnesses a surge in bond yields (interest rates) by 200 basis points to 19%. This surge implies investor concerns about potential breaches in agreements related to the sale of assets, aimed at repaying debts.
Goswami initially issued bonds with an annual interest rate of 18.75%, raising Rs. 14,300 crore. These bonds, intended to last 3 years, now face doubts about selling assets, like stakes in Afcons construction and Gopalpur Port, by December 2023, to generate at least Rs. 1,500 crore for bond repayment. Failure to do so would trigger an additional 2% interest payment, as stipulated in the bond agreement.
Shapoorji Pallonji’s spokesperson denies any breach or mandatory early repayment requirements. However, the rise in bond yields to 19% indicates increasing investor apprehension about potential default, reflecting financial troubles for the infrastructure group.
Impact on Retail Investors
Retail investors are not directly exposed to Goswami Infratch’s bonds, as these were private placements for large institutions. Yet, potential problems may indirectly affect retail investors if issues spread across Shapoorji Pallonji group’s other companies.
For instance, retail investors likely have exposure to Tata Sons, where Shapoorji Pallonji group owns a 9.185% stake, pledged against the bonds. If Goswami defaults, bondholders might force the liquidation of this Tata Sons stake, impacting Tata’s valuation and stock price.
Additionally, if asset sales falter and Shapoorji struggles to raise money, its construction arm, Afcons, could face project delays, negatively affecting partners like Larsen & Toubro with retail shareholding. Retail investors should monitor signs of distress spreading across Shapoorji’s entities.
Impact on Industries
The infrastructure and construction industries could face significant consequences if Shapoorji Pallonji’s financial troubles escalate. Issues for the group could lead to stalled projects, supply chain disruptions, and counterparty risks affecting peers.
Specifically, Afcons construction, with ongoing infrastructure projects, might experience delays if asset sales fail to ease Shapoorji’s liquidity pressures. Port operators could be impacted if the proposed sale of Gopalpur Port to Adani faces delays or cancellation.
Banks and shadow lenders with exposure to Shapoorji group debt may register losses if the group defaults, restricting new lending to the capital-intensive infrastructure space. While risks are currently localized, a default can induce wider risk aversion and tighten credit markets.
Thus, infrastructure and allied industries must prepare for potential impacts even if they have no direct dealings with Shapoorji group.
Long Term Benefits & Negatives
If Shapoorji Pallonji successfully navigates the situation and completes planned asset sales, it can emerge healthier in the long run. Deleveraging by repaying debts will improve credit ratings, allowing easier access to capital.
Stakes sold in non-core assets can provide growth capital to focus on the core construction business through Afcons. The infrastructure industry will benefit from financially sound contractors taking on long-term projects.
However, an ongoing liquidity crisis increases the risk of directorships opening up as founders sell stakes, potentially impairing business viability in the long run. Asset sales may also result in the loss of future dividends and cash flows upon economic recovery.
A wider default across Shapoorji can potentially stall infrastructure projects, worsen losses for banks, and create industry-level dislocation. Indications suggest financial distress may remain isolated if planned asset sales materialize.
Short Term Benefits & Negatives
In the near term, Shapoorji Pallonji faces significant liquidity pressures and uncertainty, reflected in the group’s entity values and bonds. Creditors may tighten or reprice terms for outstanding obligations, impacting the viability of current projects.
Delayed asset sales may hinder Goswami Infratech’s ability to meet bond repayment deadlines in December 2023, leading to higher interest payouts immediately. However, successful completion of asset sell-offs can provide timely liquidity and limit credit risk.
The infrastructure industry may benefit from the renewed participation of a deleveraged contractor in new projects. Better alignment from financial investors as new stakeholders may also improve operational efficiency.
In the near term, Shapoorji Pallonji group navigates possible defaults on one hand and opportunities to recapitalize through transactions on the other. The next 12 months are crucial for the conglomerate and associated industries.
Companies Impacted by Goswami Infratech Bond Yield Spike
Indian Companies:
Gaining:
- JSW Infrastructure: JSW acquired PNP Port from Shapoorji Pallonji at a potentially undervalued price due to financial pressure. This strengthens JSW’s port infrastructure and expands its operational capacity.
- Adani Ports & Special Economic Zone: If Adani successfully acquires Gopalpur Port at a discounted price, it will further solidify their dominant position in Indian ports and increase their market share. This could lead to higher tariffs and potentially increased profitability.
- Tata Sons: The potential sale of Shapoorji Pallonji’s 9.185% stake in Tata Sons could see the stock rise in the short term due to increased demand and reduced concerns about Shapoorji Pallonji’s financial stability.
- Debt Restructuring Firms: As distressed assets arise from Shapoorji Pallonji’s potential sales, debt restructuring firms could see increased business opportunities, potentially boosting their stock prices.
Losing:
- Shapoorji Pallonji Group: The negative market sentiment surrounding Goswami Infratech’s bonds could damage the Shapoorji Pallonji Group’s reputation and make it more difficult to raise capital in the future. This could lead to further asset sales and financial instability.
- Deutsche Bank, Standard Chartered: As investors express concerns about Goswami Infratech’s bonds, the value of their holdings could decrease, impacting their financial performance.
- High-Yield NCD Investors: The secondary market sell-off of Goswami Infratech’s NCDs could lead to price drops, causing losses for individual investors.
Global Companies:
Gaining:
- Credit Rating Agencies: As Shapoorji Pallonji’s financial situation evolves, credit rating agencies could see increased demand for their services to assess the risk of investments in the group.
- Hedge Funds: If Adani’s bid for Gopalpur Port triggers a bidding war, hedge funds participating in the acquisition could see short-term gains.
Losing:
- Global Banks: Similar to Deutsche Bank and Standard Chartered, global banks holding Goswami Infratech’s bonds could face losses if the market value continues to decline.
Please note: This is a preliminary analysis based on limited information. The actual impact on individual companies may vary depending on various factors, including the final outcome of Goswami Infratech’s financial situation and the response of the market.
Market Sentiment:
Overall, the news is likely to create negative sentiment towards Shapoorji Pallonji Group and their associated companies. However, individual companies like JSW Infrastructure and Adani Ports could benefit from potential asset acquisitions at discounted prices. The secondary market sell-off of Goswami Infratech’s NCDs could also lead to short-term volatility in the Indian high-yield debt market.